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Buy High, Sell Low

If ever there was an example of the way share buybacks help the shareholders who flee — and can hurt those who hang around — it is provided by Freddie Mac today.

Since early last year, Freddie spent $3 billion to repurchase almost 49 million shares, at an average price of around $61.50. The repurchases continued in the third quarter, while everyone knew the mortgage market was in trouble. Did it not occur to anyone that it would be nice to hold on to extra capital in a time of financial market meltdown?

Now the stock is under $27, having lost more than $11 today after announcing a $2 billion loss — and the company says it is going to try to raise capital quickly. It is also seriously considering slicing its quarterly dividend in half — to 25 cents.

Kudos to the Office of Federal Housing Enterprise Oversight for having in place rules requiring Freddie and Fannie Mae to hold extra capital.

Meanwhile, the analysts, who no doubt applauded the share repurchases, demanded on the call today that Freddie do something to get OFHEO to change the rules so it would not have to raise capital.

The real tragedy here is that Fannie and Freddie have provided the best source of mortgage funding since the private securitization market seized up. They are needed more than ever.

Under the usual conditions which have existed over the past decade or so, the idea of stock buybacks made sense. Not business sense, but sense to top management who benefited via stock options in seeing a rising stock price.

Generally most of these people stayed only for a limited time so that even if their fiscal policies were damaging over the long term they wouldn’t be around to see the consequences.

Either the current crop of CEO’s hasn’t gotten the memo (that retained capital is needed when bad debts are increasing) or there is some other group that stands to gain from such apparently foolish actions.

The only group that I can imagine that would gain by seeing companies become more distressed would be short sellers or others with various types of hedges. They are, of course, allowed to pontificate and disguise their true motives, but why would management listen to them?

There is a report out today about a number of top managers of depressed financial firms increasing their personal stock holdings. This is supposed to prove that since they have faith in the firm we should as well. Sometimes such purchases are just a way to get a rally going and don’t indicate faith, but just the opposite.

The incredibly inept repurchases by Freddie Mac are simply another grotesque metaphor of how the “financial tail” criminally dominates our so-called economy. For over twenty years, the motivation of our political and financial “mavens” has been to promote immediate “nominal prosperity” and avarice. Their primary tools included negative interest rates, endless liquidity and absurd tax policies to manipulate asset prices and, of course, the capacity to borrow! Coupled with a total breakdown of our regularity agencies, the once impressive American economy is now in the terminal “tulip” phase where gimmicks (stock repurchases), weakening of the dollar, and more “cheap” money (rate cuts) will no longer suffice!

Finally, do we dare ask what voodoo will be needed to keep the 11 trillion dollar derivative market afloat?

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Economics doesn't have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.